People in poorer countries show higher tolerance for risk

WZB-economist analyzes risk acceptance in 30 countries

Lotteries were the focus of an extraordinary experiment conducted by Ferdinand Vieider at the WZB. For the first time, the economist systematically studied risk acceptance in 30 countries from Australia to Vietnam with surprising results: people in poor countries were found to be more willing to take risks than inhabitants of richer nations like Germany. The study reveals a paradox: Until now, analyses within individual countries came to the conclusion that people with a higher income are more willing to take risks.

The experiment conducted by Ferdinand Vieider, Thorsten Chmura (University of Nottingham) and Peter Martinsson (University of Gothenburg) evaluated the risk-taking preferences of over 3,000 test subjects from 30 countries. Participants could decide in a multilevel decision process between lotteries and steadily increasing sure amounts of money. The higher the amount of money reached when the participant switched from the lottery to the sure amount, the higher was their valuation of the lottery – and thus their willingness to take a risk. Participants from poorer countries chose the lottery more often and thus allocated greater value to it. People in Ethiopia, Nicaragua and Vietnam were the most enthusiastic risk-takers in the experiment. Amongst the 30 countries, Germany came last.

The results are astonishing since the economists came across a paradox in the experiment: Until now, analyses within individual countries always came to the conclusion that people with a higher income are more willing to take risks than poorer people. When comparing average per capita income and average willingness to take risks on a national level and including developing countries in that comparison, the opposite is shown—the higher the per capita income, the lower the willingness to take risks.

Over the last ten years, countries with a higher risk tolerance also showed stronger economic growth in average. One reason might be the entrepreneurship of risk-tolerant people. So why do countries like Nicaragua and Nigeria remain poor, even though they show a high indicator for risk-taking? The researchers make it clear that in spite of a risk-tolerant population, a poor country can only develop when other conditions are met as well, like for example, political stability and the protection of private property.